Two-day ABC Trades on Goldman Sachs

Having just completed an Interactive Trading Workshop where we discussed multi-day ABCs, I thought it might be interesting to show how recent trading would have benefited from using a 2-day swing to find ABC setups on the US Bank Goldman Sachs (GS in ProfitSource).

The past couple of months have provided some great shorting opportunities on the US Banks. Goldman Sachs has run down from a top in late-March, which was on a cluster of 50% of the All Time High and 50% of the 2011 yearly range. Chart 1 illustrates this along with the 100% milestone of a 2-day ABC running into the top.

There were several trading opportunities in April and May. The first was a first lower swing top (FLST) entry on 3 April on the breaking of the low of the day before. As this was past 50% of the first range down from the May top, we would have looked at a previous retracement against the trend from early March, as shown in Chart 2. I have also displayed an exit at 100%, which gave a profit of $7.31 per CFD.

We would have been happy with that trade and been on the lookout for the first ABC short, which eventually appeared with point C on 1 May. Interestingly this was also point C for a larger range 2-day ABC short, as illustrated in Chart 3. What I liked about these trades was the way the milestones closely lined up and provided a few clusters to act as profit targets. Two-day ABCs have worked nicely on GS before so we might have been inclined to consider this bigger range as a target for at least part of our position. Perhaps this was a case for splitting our position to manage the trade using a combination of methods.

I am going to assume we took the 1-day ABC and achieved the better entry of $114.10 on the open the next day. Using a Currency style of stop would have us out of part of our position at 100% of the 1day ABC ($106.78) and trailing 1-day swings would still have us in the trade with our stop currently sitting behind 200% of the 1-day ABC ($97.09), as shown in Chart 4.

As this 200% clustered with 100% of the 2-day ABC, we might have had an additional rule to take profits at 200%. If this was the case, we would have been out of our entire position for a profit of $7.32 + $17.01 = $24.33 per CFD. Adding this to the profit of $7.31 for the initial trade meant a total profit of $31.64 per CFD for just two months trading.

In this example we didn’t have to wait to take the 2-day ABC short trade but the 2-day milestones enabled us to look at a bigger range and hence bigger profit targets for our 1-day trade. Sometimes when there isn’t a 1-day entry, a 2-day can be the answer or, as in this case, the 2-day range can add valuable information for your trade management.